Introduction

On July 28, 2006, the IRS released the final regulations under Code Section 4980G (54.4980G-1,-2,-3, -4 and -5. These regulations provide guidance on employer contributions to employees' HSAs. The IRS had released proposed regulations on August 25, 2005. The final regulations apply to employer contributions made on or after January 1, 2007. The following provides a short review of the requirements and the changes provided in the new final regulations.

A Short Review

If an employer makes contributions to employees' HSAs, the employer must make available comparable contributions (e.g. same amount or the same percentage of deductible) on behalf of all employees with comparable coverage during the same period (e.g. single/family), as provided in Proposed IRS Regulations Section 54.4980G-1, Q/A-1 and Section 54.4980G-4 Q/A 1 (a).

The testing period is the calendar year for all contributions, as provided in Proposed Regulations Section 54.4980G-1, Q/A-3.

Contributions to independent contractors, sole proprietors and partners in a partnership are not taken into account under the comparability rules, as provided in Proposed IRS Regulations Section 54.4980G-3, Q/A-2 (a), Q/A-3 (a).  All person or entities of a control group under section 414(b) (c) (m) (o) are treated as a single employer as provided in Proposed Regulations Section 54.4980G-3, Q/A-4.

The categories of employees for comparability testing remains the same.  Current full-time employees, current part-time employees and former employees. The comparability rule may apply separately to part-time employees (i.e., employees who are customarily employed for fewer than 30 hours per week) and former employees.  Proposed IRS Regulations Section 54.4980G-3, Q/A 5 (a). 

An employer's matching contributions to a cafeteria plan are not subject to the comparability rule. These contributions are subject to the cafeteria nondiscrimination rules, as provided in Proposed IRS Regulations Section 54.4980G-5, Q/A-1-3.

The comparability rule does not apply to amounts transferred from an employee's HSA or MSA.

If an employer has some employees who work full-time during the entire calendar year and other employees that work full-time for less than the entire calendar year, it meets the comparability rules if the contribution amount is comparable when determined on a month-to-month basis, as provided in Proposed IRS Regulations Section 54.4980G-4, Q/A-2 (f) (i.e. contributions will not fail to satisfy the comparability rules because an employee who terminates employment prior to the end of the period for which contributions were made has received more contributions on a monthly basis than employees who have worked the entire period).

The employer is not required to make contributions to any current or former employees who are participating in an HDHP not sponsored by the employer. If an employer does make contributions for all eligible current or former employees whether or not covered under the employer's HDHP, it then must make comparable contributions to all eligible current or former employees participating in any HDHP, whether or not sponsored by the employer as provided in Proposed IRS Regulations Section 54.4980G-3, Q/A-6, Q/A-7 (a) and (b) and Q/A-10.

If an employee and his spouse both work for the same employer, must the employer make comparable contributions to the HSAs of both employees?  The employer is not required to contribute to the HSAs of both employee-spouses, however, if the employer contributes to the HSA of any employee who is an eligible individual with coverage under an HDHP that is not an HDHP provided by the employer, the employer must make comparable contributions to the HSAs of both employee-spouses, if they are eligible as provided in Proposed IRS Regulations Section 54.4980G-3, Q/A-8.

An employer must establish a consistent policy for making its comparable HSA contributions to employees' HSAs during the calendar year.  They can contribute on a pre-funded basis annually on the first day of the calendar year, on a look-back basis at the end of the calendar year, or on a pay-as-you-go basis (usually per pay period) during the calendar year.   If it makes HSA contributions for one employee at the beginning of the calendar year (pre-funded basis), it must make contributions at the same time for all other eligible employees as provided in Proposed IRS Regulations Section 54.4980G-4, Q/A-1 (f). 

Major highlights of the Final Regulations

Individual and Family Coverage: Under Proposed IRS Regulation Section 54.4980G-1, Q/A-2, categories of comparable coverage was divided between individual and family coverage only. Under Final IRS Regulation Section 54.4980G-1, Q/A-2, the IRS has subdivided family coverage into three additional categories of family HDHP coverage, self plus one, self plus two and self plus three or more. An employer may contribute different amounts for each of these new categories of coverage,   but the employer’s contribution for the self plus two category cannot be less than the contribution to the self plus one category and the employer’s contribution with respect to self plus three or more category may not be less than its contribution with respect to the self plus two category.

Example: An employer maintains and contributes to the HSAs of eligible employees who elect coverage under the HDHP. The HDHP has the following coverage options: self-only, self plus spouse, self plus dependent, self plus spouse plus one dependent, self plus two dependents and self plus spouse and two or more dependents.

The categories of self plus spouse and self plus dependent are both the same category (self plus one). The categories of self plus spouse plus one dependent and self plus two dependents are the same (self plus two) and the self plus spouse and two or more dependents is an example of the third allowable tier under family (self plus three or more)

The employer contributes $500 to the HSA of each eligible employee with self-only HDHP coverage, $750 to the HSA of each eligible employee with self plus spouse and self plus one dependent HDHP coverage, $900 to the HSA of each eligible employee with self plus spouse and one dependent and self plus two dependents HDHP coverage and $1,000 to the HSA of each eligible employee with self plus spouse and two or more dependents HDHP coverage. The Employer's contributions satisfy the comparability rules.

Collectively Bargained Employees: Under Final IRS Regulations Section 54.4980G-3, Q/A-6, the IRS state that collectively bargained employees who are covered by a bona fide collectively bargained agreement between employee representative and one or more employers are not comparable participating employees, if health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. Former employees covered by a collective bargaining agreement also are not comparable participating employees.  Similarly contributions to collectively bargained employees would not be subject to the comparability rules.

Example: An employer offers its employees an HDHP with a $1,500 deductible for self-only coverage. It has collectively bargained and non-collectively bargained employees. The collectively bargained employees are covered by a collectively bargained agreement under which health benefits were bargained in good faith. For 2007, the employer contributes $500 to the HSAs of all eligible non-collectively bargained employees with self-only coverage under its HDHP. The employer does not contribute to the HSAs of the collectively bargained employees. The employer's contribution to the HSAs of non-collectively bargained employees satisfy the comparability rules. The comparability rules do not apply to its collectively bargained employees.

Locating Former Employees: Final IRS Regulations Section 54.4980-2, Q/A-10 provides that if an employer is making contributions to former employees, it must take reasonable actions to locate any missing comparable former employees. These reasonable efforts include the use of certified mail, the Internal Revenue Service Letter Forwarding Program or the Social Security Administration Letter Forwarding Service.

HSA Contributions made through a Cafeteria Plan: Final IRS Regulations Section 54.4980-5, Q/A-1 provides that HSA contributions made through a cafeteria plan will not be subject to the comparability rules if such contributions are made under a written cafeteria plan, the employees have the right to receive cash or other taxable benefits in lieu of all or a portion of an HSA contribution (meaning that all or a portion of the HSA contributions are available as pre-tax salary reduction amounts, regardless of whether an employee actually elects to contribute any amount to the HSAs by salary reduction.

This means that the employer must amend its cafeteria plan to provide the HSA contributions; the HSA contributions made by the employees must be voluntary but may be provided through a negative election.

Establishment Rule:  The final regulations have removed and reserved the provision dealing with instances where an employee has not established an HSA by the end of the calendar year Section 54.4980G-4, Q/A-6 (b).  No guidance available.

Providing Interest if HSA is not established at the time the Employer funds its Employees' HSAs: Final IRS Regulations 54.4980-4, Q/A-6 (a) provides that if an employee has not established an HSA at the time the employer funds its employees' HSA, the employer complies with the comparability rules by contributing comparable amounts plus reasonable interest to the employees' HSA when the employee establishes the HSA, taking into account each month that the employee was a comparable participating employee. Final IRS regulations Section 54.4980-4, Q/A-13 provides that the determination of whether a rate of interest used by an employer is reasonable is based on all of the facts and circumstances. If an employer calculates interest using the Federal short-term rate as determined by the Secretary in accordance with section 1274(d) it will be deemed by the IRS to be a reasonable interest rate.

However, no guidance was written for what an employer should do if the Employee has not established an HSA by the end of the calendar year as provided in Proposed IRS Regulations Section 54.4980G-4, Q/A-6 (b).

Link to final regulations: